Speculators Mistime Bearish Gold Bets Before Rally

Hedge funds and other speculators misjudged gold prices for a second time in three weeks.

Just after the investors sold bullion holdings for a second consecutive week, a disappointing U.S. jobs report sparked the biggest rally in prices since mid-March. Their funds fared better in the five preceding weeks, correctly adjusting wagers 80 percent of the time.

Investors who were anticipating gold’s 2014 rebound would fizzle had reason to be confident at the start of last week. As U.S. equities surged to a record, bullion slid to a seven-week low on April 1 as fewer traders saw the appeal of the haven asset. Three days later, the payrolls data drove shares lower and bullion prices 1.5 percent higher to $1,303.50 an ounce, the biggest gain since March 12.

“There’s a lot of risk to these markets,” said Uri Landesman, the president of New York-based Platinum Partners, which helps manage about $1.35 billion of assets. “There’s sort of a 50/50 chance we go to $1,400 or back to $1,200. It’s really a hard call to make. My gut feeling is that the equity markets turn down sometime soon. I think that gold could once again become a safe haven.”

Gold Holdings

Gold futures climbed 1.5 percent on April 4 when the jobs report came out, leaving them up 0.7 percent for the week. The Standard & Poor’s 500 Index dropped 1.3 percent, the most in two months and paring its weekly gain to 0.4 percent. The Bloomberg Dollar Index was little changed for the week and the Bloomberg Treasury Bond Index rose less than 0.1 percent.

Speculators’ net-long position in gold dropped 11 percent to 106,354 futures and options in the week to April 1, the lowest since Feb. 18, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop increased 32 percent to the highest in a month.

U.S. employers expanded payrolls by 192,000 jobs in March, the Labor Department said. That’s down from 197,000 added in February and less than the 200,000 forecast by economists in a Bloomberg survey. Gold climbed 6.8 percent in the first quarter, as investors’ mounting concern about the pace of economic growth revived interest in bullion as an alternative asset.

The metal tumbled 28 percent last year as some investors lost faith in gold as a store of value. Prices remain 32 percent below the record $1,923.70 reached in September 2011.

Fed Stimulus

Federal Reserve Chair Janet Yellen said last week that the economy will need monetary stimulus for “some time,” and that the central bank hasn’t done enough to cut unemployment. Bullion jumped 70 percent from December 2008 to June 2011 as the central bank pumped more than $2 trillion into the financial system and cut interest rates to a record in a bid to boost the economy.

While March payrolls came in below forecast, employers boosted the total U.S. job count to 116.1 million, topping a pre-recession peak of 116 million in January 2008. Gold’s first- quarter gains reflected bullish influences that were transient, and prices will fall as the U.S. economy recovers from a weather-driven slowdown, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc., said in a report last month.

The S&P 500 index of U.S. shares climbed 1.3 percent in the first quarter and closed at a record 1,890.9 on April 2. U.S. manufacturing orders accelerated in March, and auto sales topped estimates, private data released last week show. Gold plunged 28 percent in 2013, the most since 1981, as an equity rally and low inflation spurred some investors to lose their faith in the metal as a store of value.

Gold ETPs

Gold in global exchange-traded products tumbled 33 percent in 2013, and the value of the assets dropped $73.4 billion. The holdings fell 0.7 percent last week, the most this year.

“The job market’s going to get its groove back and pent up demand in the housing market will re-accelerate,” said Chad Morganlander, a Florham Park, New Jersey-based portfolio manager for Stifel Nicolaus & Co., which oversees $150 billion. “The economy’s going to get a pop now going into the warmer months. A gradual improvement will take the air out of gold.”

Demand in China, the world’s biggest bullion buyer, is expected to remain resilient, James Steel, a metal analyst at HSBC Securities Inc. in New York, said in an April 4 report. Imports of gold in India, the second-largest consumer, more than doubled in March compared with the prior month, according to a government official with direct knowledge of the matter.

ETF Outflows

Combined net-wagers across 18 U.S. traded commodities climbed 1.3 percent to 1.68 million contracts, CFTC data show. The gain comes as investors pulled $243.9 million from U.S.-based ETFs tracking commodities in the five days through April 3, led by an outflow from precious-metal funds, data compiled by Bloomberg show.

Bullish bets on crude oil rose 2.6 percent in the week through April 1, snapping three straight losses, the CFTC data show. West Texas Intermediate slid 0.5 percent last week in New York. Prices fell after a U.S. supply drop was tied to a waterway shutdown. The Houston Ship Channel reopened on March 26 after an oil spill closed it for four days. Crude inventories dropped 2.38 million barrels in the week ended March 28, Energy Information Administration data show.

Speculators trimmed net-short wagers in copper to 19,778 contracts. The funds have been betting on price declines for five straight weeks. Producers from Teck Resources Ltd. to Pan Pacific Copper Co. said their mines were unaffected by an April 2 earthquake that left at least six people dead in Chile.

Farm Bets

A measure of speculative positions across 11 agricultural projects climbed 4.4 percent to 1.11 million contracts, the highest since September 2010. Holdings have doubled since mid- February. The S&P GSCI Agriculture Index of eight crops jumped 15 percent in 2014, the best start to a year in a decade. Drought hurt crops in Brazil, the top grower of coffee, sugar and citrus, while a U.S. freeze and dry weather in the Great Plains threatened winter wheat this year.

The net-long position in corn rose to 275,836 contracts, the highest since 2012. Futures in Chicago gained 2 percent last week and entered a bull market on March 31 after the U.S. government said domestic inventories were tighter than analysts expected and supplies may shrink further as growers plan to sow the fewest acres in four years.

“The commodity market is still skittish,” said Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio, Texas, which oversees $1.2 billion. “The copper end is going to be sloppy for the next couple of months. The drought in Texas is still going to be an issue for wheat production. The swing in gold short-term is always that emotional swing.”